Groupon – Business Model

Groupon is an ecommerce startup launched in 2008, that employs a “one deal a day” method. Its name stems from group coupons, and the website offers marked down gift cards able to be used at companies all over the world. In 2010, two years after launching, Groupon already served over 150 markets in North America and hundreds the world over, thus exhibiting how successful this specific startup is. This company was chosen out of curiosity in finding out just how Groupon makes money and how it positions itself in the market, and we intend to adopt what we can from their prosperous business model.

Groupon makes use of transmedia marketing in order to raise awareness around the brand and the products/services they provide. In following sections, I will walk you through the different components of a contemporary business model as described by Osterwalder & Pigneur (2010). Namely, I will address customer segments, value propsitions, distribution channels, customer relationships, revenue streams, key resources, key partnerships and cost structure.

Customer Segments

Groupon’s business model targets two main customer segments, namely the customer wanting to purchase a coupon and the business who is providing the coupon. As specified by demographics broadcasted on GrouponWorks, their B2B website, Groupon’s customer base currently consists of 77% female users, 75% full-time employed and 50% earning above $70,000 in income. Please find the diagrams in the appendix that should help to better illustrate the markets they serve broken up into different demographics.

Furthermore, the segments they serve are very young, most users aged around 18-34. Groupon segments these customers based on demographics and also their purchasing history and thus they discover where the customers’ interests lie. Consequently, Groupon attempts to provide coupons for services that have the same or a similar target demographic (restaurants, hotels, massages, and other products the young generation of today makes use of). They have picked the perfect channel through which to reach the young and educated segment (the internet).

Value Proposition

A “value proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific customer segment” (Prahalad & Hamel, 1990, page 13). Groupon creates value through the low prices they offer but also through the convenience and accessibility of the wide-range of products they provide. Groupons initial value proposition was to help local businesses introduce people to their businesses, thus allowing companies to acquire future potential clients. In addition to serving as a platform for generating new customers, Groupon supplies geo-centric coupons meaning that geo-targeting advertisements place the product (coupon) at the fore of the most suitable customers. Groupon also provides a short description of the company beyond giving out the coupon. Therefore, companies that subscribe to Groupon provide coupons in exchange for good advertising. In that sense, Groupon aids in generating the desired buzz via word of mouth advertising, one of the most powerful advertising techniques.

Groupon also fosters a sense of urgency since the deals are only available for one day. As a result, the customers end up shopping at times when they wouldn’t normally do so. Groupon’s services don’t only create value for the businesses but also for the customers in the sense that they receive a high return on investment since Groupon requires companies to offer their deals at 50% off.

Channels

Groupon serves as a distribution channel for businesses and does a very good job in creating brand awareness, especially for smaller companies. However, how do they reach their customers? Groupon targets certain markets and sends personalized emails to potential clients, sometimes amounting to around 5 billion emails every month. In order to personalize the emails, Groupon collects data such as age, gender, zipcode and what you buy or click on. Once all this data is collected they process it and then know what deals should be sent where or to whom they should be sent.

Groupon uses ad agencies to help launch both regional and national campaigns aimed at getting more people to use Groupon’s services. In the introduction I mentioned Groupon’s transmedia-like nature when it comes to advertising. In recent years they have begun to advertise in newspapers, magazines and also on the radio and television. According to Screen Australia, the governmental funding body for the film production industry in Australia, when user’s actions ultimately affect the type of content across multiple platforms this creates a transmedia atmosphere. This is true in some way for Groupon in the sense that what the users view on the internet affects what type of coupons they will receive from Groupon.

Customer Relationships

Groupon creates a dialogue with the customer by sending a personalized email after every purchase with the aim of retaining the customer for future business. In a sense, Groupon also creates somewhat of a narrative with the customer in that they continuously keep them updated and send personalized emails containing products that would satisfy a certain segment, for example. Recently, Groupon has decided to create different websites that strive to attract even more customers (example: Groupon travel).

Revenue Streams

Most of their revenue depends on the number of deals they manage to sell and ultimately the size of the deal they sell. Groupon also makes revenues from businesses via subscription fees, however for normal users there is no subscription fee. In addition, they receive a small share of revenue from companies that choose to use Groupon’s ad space.

Key Resources

Their key resources are the most important assets they possess in order to make the business model work. Some of their resources are intellectual, such as customer databases. In addition, their brand name is already well-established in the online arena, thus they rely heavily on it. Groupon also relies on their human resources in that they need creativity and innovativeness in order to continue to profit. Most importantly, they depend on their financial resources in order to expand within the market in which they currently operate.

Key partnerships

Groupon’s CEO, Andrew Mason, had the idea a few years back and decided to pitch it to his boss at the time just to see what he thought of it. His boss, Eric Lefkofsky, liked the idea so much that he agreed to invest 1 million dollars as an initial investment to launch the company. Since then, it has grown to a value of nearly 2 billion dollars.

Cost Structure

Groupon’s cost structure is for the most part value-driven in the sense that they are more concerned with value creation for customers rather than cutting costs at every opportunity.

Critical evaluation

Even though it is undeniable that Groupon is a very successful business, we did find some specific strengths and weaknesses in their business plan. First of all, Groupon is quite good at targeting their audience. They target specific segments, based on a number of different criteria that allow for them to better understand their customers and help develop new ways of reaching these customers.

In addition, for companies, the value proposition is very low. Groupon requires a 50 percent discount, and on top of that revenue on every sold coupon. For example; company who usually sells their service for 100 euros sells it for 50 euros via Groupon. Of those remaining 50 euros, 50% goes to Groupon, leading to big financial loss for the company; instead of receiving 100 euros, they receive 25 euros.

This leads us to another downside for the participation companies; costumer relationships do not go up, rather down. Coupon users are not likely to be loyal to the new company, and will most likely not return for the full price. These users are more likely to become loyal to Groupon instead of the small companies.

This analysis shows that Groupon’s business model is mostly profitable for Groupon itself and not for the participation companies. Groupon will not make any losses if the coupon doesn’t sell enough, only the company will. However, the downside for Groupon is that on the long run, they won’t find companies that are willing to sell a coupon via Groupon. We suggest Groupon would look into ways were the participating companies will make more profit, but not to Groupon’s disadvantage.

End note – Takeaways

Groupon’s business model will be further analyzed and compared to the business model we created for WWF. In doing so, we will be able to identify potential gaps in WWF’s business model which will strengthen the operations of the organization as a whole. The most useful takeaway for us in this case would not be optimizing performance; rather we would like to segment our customer base in a way that is similar to Groupon. That way you really get to know your customers better and can then satisfy their needs in a more thorough fashion, so to say.

Appendix 1 – Groupon’s target markets

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6 comments on “Groupon – Business Model”

Chloe Boekaar

October 19, 2012

Hey I really liked your essay, it was very interesting especially the facts. I thought Groupon was a creative idea to use for this assignment, so good job!🙂 Also I thought it was interesting that the largest audience percentage were individuals who had a full time job and a good salary, because Groupon is known for its ‘cheap’ offers so you would think that there is a different main audience such as students.

You guys did good in arranging your essay! it was very interesting to see how Groupon uses market segmentation to its advantages, also it is interesting how you evaluated Groupon and its values and how this affects small businesses.

The key takeaways section is very useful props to that, although it only briefly explains your intentions on how to apply this model to your project, maybe something to expand on when putting into practice.